How are mortgage rates set?
Economics 101: The Reserve Bank of Australia sets what is known as the target overnight rate.
This overnight rate doubles as the interest rate chartered banks are charged to borrow money. In turn, banks use the overnight rate to set their prime lending rate – the rate they offer their best customers. When the Reserve Bank of Australia changes its overnight rate (they revisit it about eight times a year) it signals to the banks that it wants them to adjust their prime lending rates. Variable mortgage rates and lines of credit move in conjunction with the prime lending rate.
Fixed-rate mortgages are a little different. Banks use Government of Australia bonds to raise money for fixed-rate mortgages. In the bond market, interest rates fluctuate more often because they’re subject to the changing moods of traders and bond investors. These people are constantly trying to figure out how fast the economy will grow and where inflation is headed. Tip: Watch the bond market for clues on where fixed mortgage rates will go next.
Fixed, Variable, Split Loans- Which works for you?
Let the buyer beware. We have done some of the homework for you and researched the rate options available to you.
The first we will look at is the fixed-rate mortgage. The interest rate on a fixed-rate mortgage is locked in for a predetermined time depending on the term of your mortgage – it can be 1 year to ten years depending on certain banks. Fixed-rate mortgages offer the security of knowing what you will be paying for the term selected. They are often considered a safe bet for those who don’t want to worry about fluctuating rates.
Another option is variable-rate mortgage. A variable-rate mortgage in which payments are tied to the bank or lender’s prime rates, which can fluctuate several times a year. If interest rates go down, more of your payment goes towards reducing the principal; if rates go up, a larger portion of your monthly payment goes towards covering the interest.
Looking for a balance between the two? Look closely at a split loan mortgage; it is a mortgage that offers a combination of fixed and variable. You can lock in part of your mortgage at the fixed rate and the rest at the variable rate. If interest rates were to rise, the fixed portion of your mortgage would insulate you from the impact and when it goes down, gains made on the variable side would offset the higher costs of the fixed portion of your mortgage.
Studies show that homeowners can generally save over the long term with a variable rather than fixed mortgage. However, it depends on market conditions and of late, many experts believe that fixed mortgages are, in fact, the way to go. You want the advice of a Time Home Loans expert who knows the industry and knows how to read economic cues.
If it still seems a bit like gobbled-gook, call one of the Time Home Loans Team and they will gladly take the time to help you identify the right rate for your needs.